Carl Icahn Has Never Been More Short The Market, Is Pressing For A Crash

Tyler Durden's pictureby Tyler DurdenAug 5, 2016 7:24 PM61SHARESTwitterFacebookRedditThree months ago, when looking at the 10-Q of Carl Icahn's hedge fund vehicle, Icahn Enterprises, L.P. (IEP) we found something striking: Carl Icahn had put his money where his mouth was. Recall that over the past year, Carl Icahn had become one of the most vocal market bears with a series of increasingly escalating forecasts. At first, he was mostly pessimistic about junk bonds, saying last May that "what's even more dangerous than the actual stock market is the high yield market." As the year progressed his pessimism become more acute and in December he said that the "meltdown in high yield is just beginning." It culminated in February when he said on CNBC that a "day of reckoning is coming."

Some skeptics thought that Icahn was simply trying to scare investors into selling so he could load up on risk assets at cheaper prices, however that turned out to be wrong when IEP revealed that as of March 31 it had taken its net short position from a modestly bearish 25% net short to an unprecedented for Icahn 149% short position, a six-fold increase in bearish bets.

However, even as other prominent billionaires piled onto the bearish side, the market soared. And then, after Q1, it soared some more to the point where as of the end of June, following the brief Brexit dump, it was just shy of all time highs (where it is now). So there was renewed speculation if Icahn had given up on his record bearish bet. So when overnight IEP released its latest 10-Q, we were eager to find out if Carl had unwound his record short, or perhaps, added more to it. What we found is that one quarter after having a net short position of -149%, as of June 30, Icahn's net position was once again -149%, or in other words, he has once again never been shorter the market.

This is the result of a relatively flat long gross exposure of 174% (up 10% from the previous quarter) resulting from a 166% equity and 8% credit long, and another surge soaring short book which has grown even more from -313% as of March 31, 2016 to a gargantuan 323% as of the last quarter, on the back of 301% in gross short equity exposure and 22% short credit.

This is what IEP added as detail:

Of our short exposure of 323%, the fair value of our short positions represented 24% of our short exposure. The notional value of our other short positions, which primarily included short credit default swap contracts and short broad market index swap derivative contracts, represented 299% of our short exposure.

With respect to both our long positions that are not notionalized (167% long exposure) and our short positions that are not notionalized (24% short), each 1% change in exposure as a result of purchases or sales (assuming no change in value) would have a 1% impact on our cash and cash equivalents (as a percentage of net asset value). Changes in exposure as a result of purchases and sales as well as adverse changes in market value would also have an effect on funds available to us pursuant to prime brokerage lines of credit.

With respect to the notional value of our other short positions (299% short exposure), our liquidity would decrease by the balance sheet unrealized loss if we were to close the positions at quarter end prices. This would be offset by a release of restricted cash balances collateralizing these positions as well as an increase in funds available to us pursuant to certain prime brokerage lines of credit. If we were to increase our short exposure by adding to these short positions, we would be required to provide cash collateral equal to a small percentage of the initial notional value at counterparties that require cash as collateral and then post additional collateral equal to 100% of the mark to market on adverse changes in fair value. For our counterparties who do not require cash collateral, funds available from lines of credit would decrease.There was little incremental detail. One quarter ago, when asked about this unprecedented bearish position, Icahn Enterprises CEO Cozza said during the earnings call that "Carl has been very vocal in recent weeks in the media about his negative views" adding that "we’re much more concerned about the market going down 20% than we are it going up 20%. And so the significant weighting to the short side reflects that."

Considering that since then the market has soared higher on wave after wave of central bank intervention, which has brought the monthly total amount of global QE to just shy of $200 billion, after the latest QE increase by the BOE...

... perhaps Icahn's directional fears were displaced. On the other hand, since Icahn has shown no interest in unwinding his bearish position, and has kept it identical to a quarter ago, one can conclude that the financier-rapidly-turning-politician, has merely delayed his bet for a day of reckoning for the S&P500. Perhaps this time he will be right

Why Oil Under $40 Will Bring It All Down Again: That's Where SWFs Resume Liquidating

Tyler Durden's pictureby Tyler DurdenAug 6, 2016 7:30 PM7SHARESTwitterFacebookRedditAfter several months of aggressive selling of stocks in late 2015 and early 2016, the culprit for the indiscriminate liquidation and concurrent market swoon was revealed when it emerged that the seller was not only China (which was forced to sell USD-denominated reserves to offset a surge in capital outflows following the Yuan devaluation), but also Sovereign Wealth Funds belonging to oil-exporting countries, who were dumping billions in risk assets to offset the collapse of the price of oil, which in turn exacerbated current account and budget deficits.

Among the prominent sellers was Norway and Saudi Arabia, arguably the biggest casualties of the death of the Petrodollar to date, as well as Abu Dhabi, Kuwait and most other SWFs, listed on the tabel below.

As JPM calculated back in January, the SWF equity selling was inversely proportional to the price of oil: according to the bank, SWF's would liquidate some $75 billion in equities in 2017 assuming oil at $31 per barrel. Needless to say, the lower oil goes, the more selling there would be.

"This prospective $75bn of equity selling by SWFs in 2016 is not huge but becomes significant after taking into account the potential swing in equity fund flows," JPM continued, in an attempt to discuss the impact this will have on markets. "Last year retail investors bought $375bn of equity funds globally. This year we expect an amount between 0 and $200bn. Subtracting $75bn of selling from SWFs would leave the overall equity flow from Retail+SWF investors barely positive for 2016."

Then starting in February, oil - which had just tumbled to the low-$20s, its lowest price in over a decade - underwent a miraculous surge catalyzed by erroneous, if constantly reiterated, narrative of an imminent OPEC supply cut, a short squeeze, an algo stop hunt, an unprecedented Chinese importing spree to replenish its now almost full Strategic Petroleum Reserve, and even speculation of central bank intervention to prop up the "black gold." In fact, just a few months after February, oil had doubled, reaching $50 even as we and many others warned, that there simply is not enough demand and far too much supply to sustain such a price.

No matter the cause, the biggest benefit of this oil surge is that the same SWFs which were actively selling stocks in early late 2015 and early 2016 put their liquidation on hold as oil rose above $40. And in this illiquid, low volume market, the absence of a determined seller is all that it took to push the S&P to all time highs, and as of Friday's close, just shy of 2,200, a level which even sellside brokers such as Goldman believe is effectively in bubble territory and in the 99% percentile of all overvalued metrics.

However, just a few weeks later we are now back in a crude bear market, with oil briefly dipping under $40, on the back of concerns about a gasoline glut and fears that the resurgent dollar will further pressure oil. Worse, with oil returns back to the $40 range and threatens to accelerate the move to the downside, it also brings back with it the specter of SWF liquidations, because as JPM's Nikolaos Panigirtzoglou points out in his latest weekly note, that's where the wealth fund selling returns.

Here is why as oil approaches $40, the price of crude suddenly matters a lot to equity bulls:

We had noted in F&L April 22nd what the impact would be of a $45 average Brent oil price on SWF behavior. At the time, we noted that the stability in oil prices meant that the pressure on SWFs to abruptly sell assets would diminish over time. In addition, we argued that SWF selling should focus more on fixed-income securities during the last three quarters of the year, given that SWFs mostly liquidated equity and HF mandates during last year and the first quarter of this year. However, given recent declines in oil prices, we revisit the analysis assuming an average oil price of $40 for 2016 vs $45 before. The YTD average has already fallen to $42.

In our previous analysis based on a $45 average oil price for 2016, we projected the current account balance for oil-producing countries to worsen from around -$70bn in 2015 to -$140bn in 2016. This estimate is based on the same sensitivity of the current account balance to the change in oil prices as last year, i.e. between 2014 and 2015. However, the depletion of official assets could be higher than the current account deficit if these countries also experience capital outflows as it happened last year. If we assume $80bn of capital outflow for 2016, the same level as last year, we project a depletion of $150bn in FX reserves and a depletion of $50bn in SWF assets.

If we assume an average oil price of $40 for 2016 instead, using a similar sensitivity analysis and assumptions as described above, we project the current account balance for oil-producing countries to worsen from around -$70bn in 2015 to -$183bn in 2016. This would imply depletion of $170bn in FX reserves and a depletion of $75bn in SWF assets.

The differences in the SWF selling using the two different average oil price assumptions can be seen in Figure 9.

A $40 average oil price, and assuming that these reserve managers and SWFs sell in accordance to their average allocation, would imply selling of $118bn of government bonds and $45bn of public equities. If we assume reserve managers and SWFs are mostly done with selling equities and that they are more likely to liquidate fixed-income mandates, this would imply selling of around $120bn-$160bn of government bonds and $10bn-$15bn of corporate bonds. However, should oil prices continue to fall further below $40 on a sustained basis, SWFs would face greater pressure to sell equity mandates, similar to the end of last year and the beginning of this year.Indeed: the lower the price of oil drops, the faster what until recently had been a paradoxical disconnect (and even a negative correlation between oil and risk assets as we showed earlier), will recouple. And it's not just the SWF selling: recall that earlier this week, JPM's head quant Marko Kolanovic warned that should oil return back to the $30s, it would also trigger program selling of stocks.

CTA signals for oil recently turned from strongly positive to moderately negative. This has contributed to past-month divergence between S&P 500 and oil (~1.5 standard deviations) and is closely monitored by equity and high yield credit investors. It is our view that the risk of CTAs significantly increasing oil shorts over the next 1 month is low. For oil momentum to further deteriorate, oil would need to drop to ~$30 at which point the medium term momentum (strongest signal) would turn negative and trigger selling.To summarize, if oil were to drop back under $40, not only would it precipitate even more selling of oil as momentum strategies flip, but it would catalyze a liquidation by those SWFs who thought they were done selling equities, leading to a return of the same sellers that pushed the S&P back to the low 1,900s a short 6 months ago.

So for all those curious where stocks are going next, the simple answer is: keep an eye on what oil does next.

Sam RoAugust 31, 2016Ignore the warning signs at your peril.View photosIgnore the warning signs at your peril. (Image: Geograph.org.uk)MoreThere’s been an eery calm in the financial markets. The S&P 500 (^GSPC) hasn’t seen an up or down move of greater than 1% in 36 trading sessions.

Wall Street strategists warn that markets aren’t pricing in the slew of uncertainties that lie just beyond the horizon. Catalysts for volatility include the US presidential election, the next Fed rate hike, the evolving Brexit narrative in Europe, etc.

Gluskin Sheff’s David Rosenberg points to a variable in the derivatives markets that may make the stock market more sensitive and vulnerable should things go south.

“The net speculative position on the CME as far as SPX contracts are concerned have ballooned nearly 70% since mid-July to 38,083 net longs, a bullish bet we have not seen since June 2013, and this is one vivid sign of just how complacent the masses are,” Rosenberg wrote on Wednesday.

Traders and sophisticated investors use derivatives such as options and futures contracts to adjust their exposures to stock markets, largely because it’s cheaper and more tax-efficient.

Elsewhere in the derivatives markets is the CBOE Volatility Index (^VIX). VIX measures the premium people are willing to pay to protect themselves from price volatility. And lately, it’s been way below average.

Rosenberg argues that the low VIX and elevated valuations have been unfavorable for the market’s bulls. And it all speaks to the same theme of complacency and perennial bullishness as the stock market continues to trade near all-time highs.

“As per Bob Farrell and his Rule #5, ‘the general public buys the most at the top and the least at the bottom’,” he warned.

HSBC’s technical analysis team has thrown up the ultimate warning signal.

In a note to clients, Murray Gunn, the head of technical analysis for HSBC, said that he is now on “RED ALERT” for an imminent sell-off in stocks given the price action over the last few weeks.

Gunn uses a type of technical analysis called the Elliott Wave Principle, which tracks alternating patterns in the stock market to discern investors behavior and possible next moves (more details here).

In late September, Gunn said the stock market’s moves looked eerily similar to just before the 1987 stock market crash. Of note, Citi’s Tom Fitzpatrick also highlighted the market’s similarities to the 1987 crash just a few days ago. Then on September 30, Gunn said stocks were under an “orange alert” as they looked as if they had topped out.

And now given the 200 point decline for the Dow on Tuesday, Gunn said that the drop is here.

“With the US stock market selling off aggressively on 11 October, we now issue a RED ALERT,” said Gunn in the note. “The fall was broad-based and the Traders Index (TRIN) showed intense selling pressure as the market moved to the lows of the day. The VIX index, a barometer of nervousness, has been making a series of higher lows since August.”

Gunn said that if the Dow Jones Industrial Average falls below 17,992 or the S&P 500 dips under 2,116, the selling would truly set in. The Dow closed at 18,128 on Tuesday, while the S&P settled at 2136.

“As long as those levels remain intact, the bulls still have a slight hope,” said Gunn.

“But should those levels break and the markets close below (which now seems more likely), it would be a clear sign that the bears have taken over and are starting to feast. The possibility of a severe fall in the stock market is now very high.”

Stock-MarketsMartin Armstrong writes, “Apparently, there are a lot of people calling for a crash in the stock market as usual claiming it looks just like 1987. Sorry, there is nothing of that magnitude showing up at this time. We did elect one Weekly Bearish Reversal back at 18368. However, the main bank of support lies at 17710 followed by 17330. Only a weekly closing below 17330 would hint of a more serious correction.”

I agree that this market does not look like 1987. Trying to make a parallel between this market and another period is usually futile.

However, he points out to PAY ATTENTION to a break of the September 14 low at 17992.21….as I do, as well. This would warn of a drop to a lower level of support.

A lot of Armstrong’s computer analysis is based on pattern recognition. However, he may not have catalogued certain bear market patterns. For example, there is no recognition of the break of the lower trendline of the Ending Diagonal extending back to January 20.

SPX has not broken its 9-month trendline, but it has broken the lower trendline of an Orthodox Broadening Top, which has a high probability (96%) of at least a 10% correction, if not the full monte.

ZeroHedge reports, “World stocks started the week in the red Monday as the dollar touched a 7-month high and U.S. and European government bond yields climbed to their highest since June following the Friday speeches by Eric Rosengren and Janet Yellen which hinted the Fed's next step could be to pursue a steepening of the TSY yield curve the same as the BOJ.

Echoing what we said previously, Ric Spooner, chief market analyst at CMC Markets in Sydney, wrote that "markets are reacting to the possibility that the Fed might join the Bank of Japan in conducting policy to steepen the yield curve. In the Fed's case, this might amount to running the gauntlet of higher inflation with a very slow pace of monetary tightening."

TNX appears to be drifting lower after challenging its 2-hour Cycle top at 17.97 on Friday and probing as high as 18.14 in the futures over the weekend.

The higher probe does not appear to register in today’s action, now that the cash market in Treasuries is open. If that resistance holds, we may have a reversal pattern the portends lower yields.

TNX is scheduled for a Master Cyle low starting in the last week of October. If the Cycles are on a two-week delay as I have suggested, that low may extend through election day.

The Shanghai Index B-shares took a 6.2% hit this morning. The B-Shares are less liquid than the A-Shares that we see in the chart to the left. However, we may wish to watch this market. Thus far we only see a drop of 22.50 points in the Shanghai Composite. However, a drop beneath 3000.00 may set off a panic decline this week.

USD probed to 98.15 over the weekend, just three ticks high than the 98.12 high registered on Thursday. Whether it shows up in the daily cash market is unknown, but it appears that this weekend was marked by the Cycles Model for an (inverted) Trading Cycle high. It is now due for a sharp decline into a Master Cycle low that may not be complete until after the election.

Gold also sports a Triangle Wave (B), as does the SPX. Whatever may be happening may affect stocks and commodities, including Gold, as the USD plummets. I hope that I am wrong and Gold offers a safe haven during the decline, but its looking less and less likely.

We should see a bounce, at least to the mid-Cycle resistance at 1255.50, but the Cycles Model says that the decline may continue for at least another 2 weeks. A drop beneath the Orthodox Broadening Top trendline at 1180.00 may trigger a decline to 900.00 or lower.

11 Getty ImagesBlack Monday was Oct. 19, 1987.Stocks have stalled. Bond yields are rising. And perhaps most ominously—it’s October. So it’s no wonder investors are jumpy.

In fact, Wednesday will mark the 29th anniversary of Black Monday. On Oct. 19, 1987, stock markets around the world imploded, with the Dow Jones Industrial Average DJIA, +0.42% dropping 508 points, or 22%, marking its largest one-day percentage decline on record.

A number of charts have been making the rounds warning of parallels with 1987. Market technical analyst Murray Gunn of HSBC last month warned that a breach of the 2,116-1,991 range by the S&P 500 SPX, +0.62% or of the 17,992-17,063 area by the Dow could trigger a bigger selloff.

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See: The stock market is turning into a sloppy, ugly mess—and it could get worse

Enter Ryan Detrick, senior market strategist at LPL Financial. The analyst offered a pair of charts in a late Tuesday blog post that seeks to put the market’s 1987 and 2016 performances in perspective.

Read: The stock market has been losing its grip on rallies at 3 key times during the day

First up, he acknowledges that the pattern in 2016 and 1987 bear some similarities:

Source:: LPL Financial LLC.But Detrick argues that there are also some significant differences, as well as ongoing arguments over exactly what caused the 1987 crash. The “bottom line,” he writes, is that 1987 saw stocks rocket higher in a near vertical start to 1987, leaving the S&P 500 up nearly 40% by the end of September. The fact that stocks were “extremely stretched” made a large pullback much more likely.

With that in mind, charting year-to-date percentage returns “shows a totally different story and diffuses much of the worry about a coming 20% drop,” Detrick said, pointing to the chart below:

Detrick isn’t a fan of overlaying a chart from one year on top of another, noting that a similar round of comparisons were made with 1929 in 2014.

“The bottom line is no two years are ever the same and to suggest they are is uninformed,” he wrote

4 Dow has closed below its 50-day MA without touching 200-day MA intraday for 31 straight daysAFP/Getty ImagesAn obscure and rare chart pattern, which on the surface appears to say nothing, is actually sending an important message about the stock market, at least for the near term -- the rally off the February lows has already ended.

The Dow Jones Industrial Average DJIA, -0.09% closed below its 50-day moving average, which many technicians believe defines the short-term trend, for the 31st straight session. At the same time, the Dow has yet to slip enough to touch its 200-day moving average, which is seen as a dividing line between longer-term uptrends and downtrends, even on an intraday basis.

The next longest streak that the blue-chip barometer was stuck between the two moving averages was the 29-day stretch ending in November 1989.

FactSetMark Arbeter, a chartered market technician and president of Arbeter Investments LLC, said it isn’t uncommon for an index or stock to break below its 50-day moving average, and then stabilize, before heading down to its 200-day moving average.

But as history shows, the current stretch of stabilization is pretty rare indeed.

“What I believe the market is telling us is that the uptrend since February is over and that we need some time to pause/correct,” Arbeter said.

The reason for the bearish bent may be more behavioral than technical.

As any Wall Street trader will tell you, it is a lot easier to sit patiently with a long position, when the market is motionless, but in a bullish technical position, than it is when the market is doing nothing, but just below a key support level.

This type of inactivity is rare because it has to follow a rally strong enough to lift the 50-day moving average well above the 200-day moving average. And the initial pullback into short-term bearish territory had to be shallow enough, and not trigger any panicky follow-through selling, to keep the moving averages from converging too quickly.

FactSetThe Dow closed Friday down 16.64 points at 18,145.71. That is below the 50-day moving average, which extended to 18,313.50 and has been falling by an average of 5.64 points a day this month, and well above the 200-day moving average at 17,671.17, which has been rising by an average of 4.20 points a day. See Market Snapshot.

Don’t miss: The stock market is caught deep inside ‘no man’s land.’

To break the multidecade streak, the Dow would have to close up over 162 points on Monday, or fall at least 470 points intraday.

In the current environment, the market is taking a much needed breather, Arbeter said, after such a sharp run up -- 19% -- from the Feb. 11 closing low to the August record highs.

“So far, the breather has not led to much price deterioration in the major indices, but we have certainly seen some weakness under the surface with respect to some breadth measurements,” Arbeter said.

For example, Arbeter said less than half of the stocks trading on the New York Stock Exchange are below their 50-day moving averages. “Three months ago, more than 80% of issues were above their 50-day average,” he said

Mark Faber, Dr. Doom himself, recently told CNBC that “investors are on the Titanic” and stocks are about to “endure a gut-wrenching drop that would rival the greatest crashes in stock market history.”

Jim Rogers, who founded the Quantum Fund with George Soros, went apocalyptic when he said, “A $68 trillion ‘Biblical’ collapse is poised to wipe out millions of Americans.”

Unfortunately, these warnings are tame compared to their peers.

“U.S. stocks are now about 80% overvalued,” says Andrew Smithers, the chairman of Smithers & Co. He backs up his prediction using a ratio which proves that the only time in history stocks were this risky was 1929 and 1999. And we all know what happened next. Stocks fell by 89% and 50%, respectively.

This simple sandcastle analogy proves an economic collapse is imminent. Click here to see how...This simple sandcastle analogy proves an economic collapse is imminent. Click here to see how…

Even the Royal Bank of Scotland says the markets are flashing stress alerts akin to the 2008 crisis. They told their clients to “Sell Everything” because “in a crowded hall, the exit doors are small.”

Blue chip stocks like Apple, Microsoft, and IBM will plunge.

But there is one distinct warning that should send chills down your spine … that of James Dale Davidson.

As a renowned economist, best-selling author, and founder of Strategic Investment, Davidson makes the strongest case for a looming crisis — “Right now, there are three key economic indicators screaming SELL. They don’t imply that a 50% collapse is looming, it’s already at our doorstep.”

Editor’s Note: Click Here to See the 3 Indicators That Prove a 50% Stock Market Collapse is Looming.

Davidson’s warning is the most alarming of all his peers.

Not just because he makes the strongest case for a collapse (he uses over 20 unquestionable charts to prove his point), but also because Davidson has a remarkable track record of calling every major economic shift over the last three decades. For example, Davidson predicted the collapse of 1999 and 2007, along with the fall of the Soviet Union and Japan’s economic downfall, to name just a few.

His predictions are so accurate, he’s been invited to shake hands and counsel the likes of former presidents Ronald Reagan and Bill Clinton — and he’s had the good fortune to befriend and convene with George Bush Sr., Steve Forbes, Donald Trump, Margaret Thatcher, Sir Roger Douglas and even Boris Yeltsin.

Hence, if Davidson calls for a 50% market correction, one should pay heed.

Davidson goes on to say, “I know that everywhere you turn things look pretty good. The market is near all-time highs, the dollar is strong, and real estate is booming again. But remember, the exact same scenario played out in 1999 and 2007. The economy is unraveling right now, and fast. Very fast.”

However, it’s not just a 50% stock market collapse that Davidson is warning about. He also predicts that “real estate will plummet by 40%, savings accounts will lose 30%, and unemployment will triple.” (To see Davidson’s research behind these predictions, click here.)

“I am not a man who likes to preach doom,” Davidson reminded me.

Indeed, during his career, he’s made investment recommendations that have spun off a good deal of money … like the $10 million windfall he banked in a natural-resource company, and the time he told people to scoop up Philip Morris for gains of 405%.

And although our future may seem bleak, as Davidson says, “There is no need to fall victim to the future. If you are on the right side of what’s ahead, you could seize opportunities that come along once, maybe twice, in a lifetime.”

In a new video presentation Davidson not only explains exactly why the economy is already collapsing, but also reveals what he and his family are doing to prepare right now. (It’s unconventional and even controversial, but proven to work.)

While Davidson intended the video for a private audience only, original viewers leaked it out and now tens of thousands are downloading the video every day.

One anonymous viewer wrote “Davidson uses clear evidence that spells out the looming collapse, and he does it in a simple language that anyone can understand.”

Indeed, Davidson uses a sandcastle, a $5 bill, and straightforward analogies to prove his points.

14 Economy is in good shape, but high asset prices are a danger, writes Martin Feldstein

Stocks prices are about 60% above the long-term average.CAMBRIDGE, Mass. (Project Syndicate) — Although the United States economy is in good shape — with essentially full employment and an inflation rate close to 2% — a world of uncertainty makes it worthwhile to consider what could go wrong in the year ahead. After all, if the U.S. economy runs into serious trouble, there will be adverse consequences for Europe, Japan, and many other countries.

Economic problems could of course originate from international political events. Russia has been acting dangerously in Eastern and Central Europe. China’s pursuit of territorial claims in the East and South China Seas, and its policies in East Asia more generally, is fueling regional uncertainty. Events in Italy could precipitate a crisis in the eurozone.

But within the U.S., the greatest risk is a sharp decline in asset prices, which would squeeze households and firms, leading to a collapse of aggregate demand. I am not predicting that this will happen. But conditions are becoming more dangerous as asset prices rise further and further from historic norms.

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Equity prices, as measured by the price-earnings ratio of the S&P 500 stocks SPX, -0.17% , are now nearly 60% above their historical average. The price of the 30-year Treasury bond is so high that it implies a yield of about 2.3%; given current inflation expectations, the price should be about twice as high. Commercial real-estate prices have been rising at a 10% annual pace for the past five years.

These inflated asset prices reflect the exceptionally easy monetary policy that has prevailed for almost a decade. In that ultra-low-interest environment, investors have been reaching for yield by bidding up the prices of equities and other investment assets. The resulting increase in household wealth helped to bring about economic recovery; but overpriced assets are fostering an increasingly risky environment.

To grasp how risky, consider this: U.S. households now own $21 trillion of equities, so a 35% decline in equity prices to their historic average would involve a loss of more than $7.5 trillion. Pension funds and other equity investors would incur further losses. A return of real long-term bond yields to their historic level would involve a loss of about 30% for investors in 30-year bonds and proportionately smaller losses for investors in shorter-duration bonds. Because commercial real-estate investments are generally highly leveraged, even relatively small declines in prices could cause large losses for investors.

The fall in household wealth would reduce spending and cause a decline in gross domestic product. A rough rule of thumb implies that every $100 decline in wealth leads to a $4 decline in household spending. The return of asset prices to historic levels could therefore imply a decline of $400 billion in consumer spending, equal to about 2.5% of GDP, which would start a process of mutually reinforcing declines in incomes and spending leading to an even greater cumulative impact on GDP.

Because institutional investors respond to international differences in asset prices and asset yields, the large declines in U.S. asset prices would be mirrored by similar declines in asset prices in other developed countries. Those price declines would reduce incomes and spending in other countries, with the impact spread globally through reduced imports and exports.

I must emphasize that this process of asset-price declines and the resulting contraction of economic activity is a risk, not a prediction. It is possible that asset prices will come down gradually, implying a slowdown rather than a collapse of spending and economic activity.

But the fear of triggering a rapid decline in asset prices is one of the key reasons why the Federal Reserve is reluctant to raise short-term interest rates more rapidly. The Fed increased the overnight rate by just 0.25% in December 2015 and is likely to add just another 25 basis points in December 2016. But that will still leave the federal funds rate at less than 1%. With the inflation rate close to 2%, the real federal funds rate would still be negative.

Market participants are watching the Fed to judge if and when the process of interest-rate normalization will begin. Historical experience implies that normalization would raise long-term interest rates by about two percentage points, precipitating substantial corrections in the prices of bonds, stocks, and commercial real estate. The Fed is therefore trying to tamp down expectations concerning future interest-rate levels, by suggesting that changes in demography and productivity trends imply lower real rates in the future.

If the Fed succeeds, the decline in asset prices may be diminished. But the danger of sharp asset-price declines that precipitate an economic downturn should not be ignored.

This article has been published with the permission of Project Syndicate — What Could Go Wrong in America?

There are four market risks bigger than the election and Fed, financial advisor saysMichelle Fox | @MFoxCNBCThursday, 3 Nov 2016 | 4:37 PM ETCNBC.comCOMMENTSStart the Discussion Forget the election and Fed, there are bigger market risks Forget the election and Fed, there are bigger market risks Thursday, 3 Nov 2016 | 2:15 PM ET | 03:51Investors may be focused on the election and the possibility of a Federal Reserve interest rate hike, but there are bigger risks to the market, financial advisor Ron Carson told CNBC on Thursday. Specifically, he believes there are four major disruptors investors need to be prepared for, the biggest concern being emerging technology's impact on industries.

"I think we're at the very beginning stages of having total disruption," the CEO of Carson Wealth Management said in an interview with "Power Lunch."

"It's going to replace massive number of jobs."The other "buses" Carson believes are heading for financial advisors and their clients are the global central banks' unprecedented negative interest rates, regulatory forces in every industry stifling innovation and making growth more expensive, and investors and clients pulling money out of the markets.

His advice to investors is to "hug your risk budget."

"Investor behavior is what destroys wealth because they are not prepared for what can possibly happen," said Carson, who is a member of the CNBC Digital Financial Advisor Council.

"It's expensive to hedge, but it's fire insurance."

Carson said he believes the stock market will be slightly higher in 10 years, maybe by compounded 2 or 3 percent. That means investors need to look for alternative ways to accumulate wealth.

"The markets are hideously inflated," warned Stockman on CNBC's "Fast Money" this week. The former Director of the Office of Management and Budget under President Ronald Reagan urged investors to dump stocks and bonds ahead of the dangers that both Donald Trump and Hillary Clinton pose to markets if either is elected as President.

"If you don't sell before the election, certainly do it afterwards. Government is going to be totally paralyzed regardless of who wins," he said. "There could be a 25 percent draw down on markets."Stockman posits that, under a Clinton administration, official investigations and new hacked email disclosures from Wikileaks will be non-stop. Furthermore, he reasoned that the "house will become a killing field" for anything Clinton is trying to do. Ultimately, Stockman said the Democrat would enter the Oval Office bruised, bloody and all but lacking in legitimacy.

"For six months, or even longer, there will acrimony, there will be brinkmanship, there will be paralysis. There will be a swarm of house committees doing investigations from all of these wiki leaks!" Stockman said of Clinton's hypothetical early days in the White House.

"Therefore, there will be no baton handed off from the Fed to fiscal policy as we slide into recession," he added.

Stockman, who spent twenty years on Wall Street with Salomon Brothers and Blackstone and served as a Congressman for Michigan, said the IRS is the government agency that is the clearest indicator that a storm is brewing over financial markets.

"The IRS said that last year revenue was up 1 percent and, in the last quarter, it was down 4 percent," explained Stockman. "And, in the five months since May, payroll withholding was barely keeping even with wage inflations. That means the work hours aren't happening."

From here, Stockman reasoned that with a paralyzed congress, a soon-to-expire debt ceiling, a powerless central bank and a market that's been flat for 700 days, that the pieces are in place for a crisis.

"We're in the same place today as we were in December of 2014," explained Stockman. "There's massive risk. So what's the possible reward?"

Indeed, the S&P 500 Index has gained just over 1 percent in nearly two years while the Dow Jones Industrial Average has gained just .70 percent.

Warren Buffett has not predicted a stock market crash, but he has made some interesting investment decisions in recent years.

Buffett has been shedding his positions in some major U.S. stocks for the past several years, particularly those that rely on consumer spending. For example, between 2012 and 2014, Berkshire Hathaway cut its holdings of Johnson & Johnson (NYSE: JNJ) by 96.8% and slashed holdings of Kraft Foods Group Inc. (Nasdaq: KRFT) by 99.7%.

While Buffett, in a spring interview with CNBC, indicated that he felt optimistic about the market long term, his actions haven't reflected this same level of confidence. Despite still being heavily invested in consumer and financial stocks, a recent SEC filing reveals some interesting news.

Profit Alert: The Subprime Auto Loan Market Is About to Collapse – Here's How to Profit

Buffett is now holding $55 billion in cash, the largest reserve ever held by his company.

Latest Stock Market Crash Predictions: George Soros

In the spring of 2016, Soros made it clear that he believes we're headed for a situation similar to the stock market crash of 2008.

Soros hedged his own positions by purchasing 19 million shares of Barrick Gold Corp. (NYSE: ABX) and began placing "put" options on S&P 500 stocks mid-year. He purchased 2.1 million put options in the spring and increased his holdings to 4 million options as of the end of June. Soros believes that much of the trouble with the current financial markets has to do with China and its overabundance of debt.

Latest Stock Market Crash Predictions: Carl Icahn

Carl Icahn started warning investors of "danger ahead" back in September 2015. While the market took a dip in early 2016, it recovered and many investors turned away from Icahn's prediction.

Icahn is now warning of a "Day of Reckoning" should we not receive some sort of economic stimulus from Washington. Since that isn't likely to materialize, the billionaire investor has also bet big on a stock market crash. At last report, Icahn Enterprises has a net short position of 149%, meaning the value of its short positions far outweighs the value of its long positions.

Latest Stock Market Crash Predictions: Jeffrey Gundlach

CEO of the Los Angeles-based DoubleLine Capital, Jeffrey Gundlach oversees more than $100 billion in investments. Gundlach is a member of the Barron's Roundtable and is considered a top fixed-income investor.

As of this summer, Gundlach announced that he is heavily invested in gold and gold miner stocks while avoiding many other stocks. Gundlach also admitted in September that his firm is shorting consumer discretionary stocks, a sure sign that its market outlook remains dim.

Don't Miss: One of the Best Defense Stocks to Buy Now

Latest Stock Market Crash Predictions: Sandy Jadeja

The name Sandy Jadeja may not be instantly familiar to the average investor, but market experts have learned to listen when he makes a prediction. Jadeja is a technical analyst and chief market strategist at Core Spreads. He also accurately predicted four previous stock market crashes to the precise date and time.

Just a year ago, Jadeja predicted that early January was going to be bad news for the Dow, which went on to lose 11.2% over 11 trading days. While Jadeja's latest date predictions haven't come to pass, they remain an ominous warning of a potential stock market crash in 2016.

Latest Stock Market Crash Predictions: Robert Kiyosaki

Robert Kiyosaki published the book "Rich Dad Poor Dad" in 2001 and changed the way millions of people view money and investments.

What many don't realize is that Kiyosaki also predicted a 2016 stock market crash in his 2002 book "Rich Dad's Prophecy." In the book, Kiyosaki reasoned that 2016 would be the year that a massive wave of baby boomers would hit the age of 70 and begin taking distributions from traditional IRAs, effectively pulling money from the market.

Kiyosaki also blames China's long-running bubble and warns that a lack of economic stimulus is going to trigger a crash. He reports that he is heavily invested in gold and recommends this as a safe haven.

Latest Stock Market Crash Predictions: Shah Gilani

Money Morning Capital Wave Strategist Shah Gilani predicted the 2008 stock market crash and has a similar forecast for 2016. Gilani blames the central banks and their policies, which are devaluing currency and driving investors to stocks, effectively creating an overvalued market.

Gilani points out that, in the United States, growth in GDP (up just 1.2% in Q2) doesn't support these inflated market gains. Gilani is another expert that recommends a short position so that investors can profit from a market crash.

While there are so many experts predicting a stock market crash, the worst thing an investor can do is panic. That's why we've listed several ways for investors to protect themselves from a market crash…

Protect Yourself and Even Profit During a Stock Market Crash

If you were paying attention to what many of these market experts are doing, you already have an idea on how to protect yourself from a market crash. Investing in gold is a safe-haven move that pays off in volatile markets. Money Morning Global Credit Strategist Michael E. Lewitt recommends the SPDR Gold Trust (NYSE Arca: GLD).

While you can place "put" options on individual stocks, that's complicated, risky, and a lot of work. Instead, take a look at the ProShares Short S&P 500 ETF (NYSE Arca: SH), which is a reverse ETF that is going to make you money when the S&P 500 goes down.

And those are only two ways you can profit from a stock market crash. Here's our complete guide on how to protect yourself and even profit during a market crash.

Follow Money Morning on Facebook and Twitter.

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Market indicator hits extreme levels last seen before plunges in 1929, 2000 and 2008Tae Kim | @firstadopter7 Hours AgoCNBC.com837SHARES Shiller: It's not a good time, but I'm not saying panic Shiller: It's not a good time, but I'm not saying panic 7 Hours Ago | 06:10While the S&P 500 is reaching all-time highs on optimism over Donald Trump's economic agenda, some Wall Street strategists are increasingly worried about a widely followed valuation measure that's reached levels that preceded most of the major market crashes of the last 100 years.

"The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble," Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.

Newman said even if the market's earnings increase by 10 percent under Trump's policies "we're still dealing with the same picture, overvaluation on a very grand scale."

Shiller CAPE PE Ratio Chart

Source: Multpl.com

The Shiller "cyclically adjusted price-to-earnings ratio" (CAPE) is calculated using price divided by the index's average historical 10-year earnings, adjusted for inflation. Yale economics professor Robert Shiller's research found future 10-year stock market returns were negatively correlated to high CAPE ratio readings on a relative basis. He won the Nobel Prize in economics in 2013 for his work on stock market inefficiency and valuations.

Other academics agreed the current extreme CAPE ratio of 27.7 is a worrying sign for future returns versus bonds.

"Only when CAPE is very high, say, CAPE is in the upper half of the tenth decile (CAPE higher than 27.6), future 10-year stock returns, on average, are lower than those on 10-year U.S. Treasurys," Valentin Dimitrov and Prem C. Jain wrote in paper titled "Shiller's CAPE: Market Timing and Risk" on Nov. 17.

Even based on the more common price-earnings ratio, the market looks rich. The S&P 500's P/E based on earnings of the last 12 months is 18.9, the highest in more than 12 years, according to FactSet.

"U.S. valuations start off as being high both on a historical basis and also on a peer group. Certainly based on the Shiller PE, the equity market seems expensive," Jefferies chief global equity strategist Sean Darby wrote on Nov. 29

1 1 0 2Stock, bond markets could see sharp declines: U.S. financial watchdogReuters | December 14, 2016Low long-term interest rates have given businesses incentives to borrow and pushed investors to pay more for higher-yielding assets such as equities and commercial real estate, it said.bond

NEW YORK: Stock and bond markets may be riding for a fall as equity prices soar and interest rates stay low, a federal monitor of U.S. financial stability said on Tuesday, warning that such a tumble could inflict serious damage on banks, life insurers and other important parts of the economy.The Office of Financial Research found stock valuations, measured by comparing prices to earnings, have reached the same high level that they hit before “the three largest equity market declines in the last century.”At the same time, commercial real estate prices have climbed while capitalization rates, which measure properties’ returns, are close to record lows, it found.A price shock in one of these markets could threaten financial stability by hurting funds and banks that have high leverage or rely on short-term funding, the office added in its annual report on the leading risks to the financial system.In the report it said there were also risks posed by large and interconnected banks, Brexit, computer hacking, swaps clearinghouses, shadow banking and pressures on life insurance companies.President-elect Donald Trump’s election victory has fueled a stock rally, with the S&P 500 and Dow hitting record highs on Tuesday, which could push valuations further upward. [.N]

The office also found nonfinancial firms went deeper into debt this year to take advantage of low interest rates. A possible wave of defaults by those companies could hurt their lenders: banks, mutual funds, life insurers and pensions. Credit to corporations is growing faster than the U.S. gross domestic product and the ratio of their debt to earnings “is historically high and rising,” it said.“In the last three decades, corrections in corporate debt, equity prices, and commercial real estate prices have often coincided,” it said. “Continued low interest rates likely have strengthened the links among these markets.”Low long-term interest rates have given businesses incentives to borrow and pushed investors to pay more for higher-yielding assets such as equities and commercial real estate, it said.Investors are now vulnerable to “to heavy losses from even moderate increases in interest rates.”The office was created in the 2010 Dodd-Frank Wall Street reform law to watch for warning signs of another financial meltdown on par with the 2007-09 crisis. It is housed in the Treasury Department, but its research supports the Financial Stability Oversight Council made up of the heads of all the financial regulators. While Trump and Republican lawmakers have pledged to roll back parts of Dodd-Frank, the office’s research is expected to continue.Currently the government is in a court battle over FSOC’s designation of MetLife Inc (MET.N) as “systemically important,” which can lead to requirements to hold more capital.In its report, OFR warned that low interest rates have pushed down insurers’ earnings and that the companies are vulnerable to stock market declines. Also, major insurers are connected to large banks and institutions, and there could be spillover effects if one failed, it said.OFR said that since the crisis the U.S. banks often considered “too big to fail” have become more resilient.But it added the eight biggest banks “remain large, complex, and interconnected enough to pose potential risks to the U.S. financial system.” The plans known as “living wills” that banks develop for managing a possible failure are weak and demonstrate that a bankruptcy could still threaten stability, it added.Shadow banking, where companies that are not banks make loans, also poses a risk because lenders do not have government backstops and because there is limited data on the extent of its reach in the financial system, the report also said.

Don't trust the market rally—a correction is comingWilfred Frost | @WilfredFrost8 Hours AgoCNBC.com222SHARES What can ruin the Trump rally? What can ruin the Trump rally? Friday, 16 Dec 2016 | 5:01 PM ET | 05:38As the Dow flirts with hitting 20,000 for the first time ever, having risen more than 8 percent since the election, I am left thinking – SERIOUSLY?

The single biggest factor behind the market's rise over the last decade has been central bank support. That is now either being removed, or ineffective. Even if you think yields are rising for the right reasons, to expect a totally smooth and uneventful transition is hugely optimistic.

The "right reasons" would be moderate and stable inflation caused by sustainable growth. Even in the rosiest of outlooks, where we now transition to that, I would expect there to be bumps (and we are surely at the crest of one after the recent run). But I am also dubious that a significant and sustainable uptick in growth is imminent either way.

Interest rates going up do not have to be a bad thing. However, the world is MORE indebted today than it was coming into the crisis ten years ago. Yes some nations including the U.S. have cut their deficits since 2008 – but this merely slows the pace at which the national debt is increasing each year – it is still rising. In that regard, rising rates are a major headwind, and begs the added question of whether Trump's proposed fiscal expansion is coming too late (something that the low unemployment rate also suggests).

And in certain places leverage has not just continued to tick up but actually soared. China is the clear example. Last week was a great example – retail, manufacturing and fixed asset investment numbers were all encouraging. And then the following day we saw why – lending data shot up. The Chinese economy is propped up on loose policy and credit more than ever.

"The single biggest factor behind the market's rise over the last decade has been central bank support. That is now either being removed, or ineffective. Even if you think yields are rising for the right reasons, to expect a totally smooth and uneventful transition is hugely optimistic."Plus, like many emerging markets, China is a major loser from the stronger dollar. As we were reminded earlier in 2016 the Yuan has been artificially propped up for years. On Friday, the Yuan was fixed at its lowest level in 8 years despite the PBOC's FX reserves dropping $120 billion in the last two months – the ability to continue to prop up the currency is slipping. Investors are more attuned to this particular issue than they were in January this year, but the potential for a negative China shock in 2017 is very real.

Elsewhere on the international scene there remain huge hurdles in Europe. Yes Brexit, Trump and the Italian referendum have suggested, in hindsight, that markets can overreact to political risk, but countries representing 42 percent of EU GDP face elections in the next 12 months, and that doesn't even include the UK which faces its own battles following the Brexit vote. And when it comes to the economy – and the same is true in Japan too – if the Trump optimism that has caused yields to rise globally does not sustain, what else can the ECB and BOJ do to stimulate what remains very low growth in those places?

One thing that makes me reconsider my bearishness is recent conversations with bank CEO's like Jamie Dimon and Brian Moynihan. Their tones have transformed from just a few months ago. But remember that the huge bounce in bank share prices comes in response not just to underperformance throughout 2016, but underperformance for the last decade.

Low interest rates and QE were good for many equities but not banks. Now, as rates rise it is clearly a boon for banks, and that doesn't even tackle the potential bonus if there is a change of direction in regulation. But – a positive stance on the banks does not necessarily mean good news for everyone.

Finally – even if you are upbeat about GDP growth, that doesn't necessarily mean you should be about equity markets. Correlations between the two are not in fact that strong. By definition rising rates make other asset classes like cash and bonds more attractive relative to the recent past. Plus, markets have run up sharply already – the Dow nearly doubling since 2009. Whilst it is hard to bet against the current upward momentum, a correction is due, and a more prolonged pullback is very possible too.

Home Markets U.S. & Canada Need to Know GET EMAIL ALERTSWhy January will be the end of any Dow 20,000 hopesBy Barbara KollmeyerPublished: Dec 22, 2016 2:45 p.m. ET

16 Critical information for the U.S. trading dayAFP/Getty ImagesSliding back on the slow climb to 20K.If the Dow was meant to have hit 20,000 by now, wouldn’t it have happened?

It’s a fair question to ask, as investors watch the index back off what seemed a sure thing only a few days ago. Some, like FXTM’s Hussein Sayed, say breaking that psychological level could open the door to more buyers, as it suggests bulls are still in control.

But the index DJIA, -0.12% has run up 14% year-to-date, which opens up another investor dilemma.

“As gratifying as it would be for the Dow to hit 20,000, there’s an awful lot of potential profit that can be booked from the rally of the last six weeks,” ADS Securities’s Remo Fritschi says in his own note. Nuveen’s Bob Doll would disagree, as his latest advice is don’t hide out in cash.

On to our call of the day, which says forget 20,000 for now, because 19,000 is likely to come first. That is according to Newton Advisors’s Mark Newton, blogging for See It Market.

He expects stock markets will pull back in January, citing these reasons: overbought conditions; so-called exhaustion signals that show a market trend (up in this case) is nearing an end; and overly bullish investor sentiment. Others, like Northman Trader’s Sven Henrich, say red flags are piling up right now.

Newton notes how the Dow took 14 years to get from 10,000 to 15,000, three years to get from 15,000 to near 20,000, and then just two months to rise around 2,000 points.

“The mentioning of these levels, however, DOES play a critical role in giving conviction to those that are long, while nudging others to join the party. This often occurs at the exact wrong time. Investor sentiment tends to grow around round numbers, which is largely media-driven,” says Newton. Ouch!

It doesn’t look like the data is doing much to jolt this market out of its preholiday lull. Read on for more on the last big data dump of 2016.

The economyDurable-goods orders dropped for the first time in five months, GDP was raised to a 3.5% growth rate, and weekly jobless claims jumped to a 6-month high.

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Alibaba BABA, +0.12% has been put back on a U.S. list of global marketplaces known for fake goods.

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The quote“This was a counterproductive exercise in reaffirming to the rest of the country that North Carolina wants to remain mired in this divisive dispute.” — Simone Bell, Southern regional director at gay-rights group Lambda Legal, after North Carolina lawmakers failed to stick to a deal to repeal a controversial bathroom law

Follow Imperial College ✔ @imperialcollege#OnThisDay 1882: Edward Johnson created the first string of electric lights for decorating a Christmas tree5:25 PM - 22 Dec 2016 50 50 Retweets 55 55 likesNeed to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. Be sure to check the Need to Know item. The emailed version will be sent out at about 7:30 a.m. Eastern.

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+ FollowSharePost CommentNEWEST | OLDESTDenys Dlaboha 2 hours agoHey Barb - this happens every year in december - you should be fired!

of course volatility is high... everyone is going either on vacation or starting their holidays!!!! that's why the "fear" is kicking in... come january it'll pop! and dow will Shatter through 20K the morning of Monday Jan 23!

Write some real news!

FlagShareLikeReplymike chanoski 5 hours agowho cares about dow20000. I have 10% in short term gains since the election...10% in 6 weeks. that my friends is not chump change! as cramer says bulls make money , bears make money and pigs get slaughtered. speaking of pigs I bought pork loins for 99 cents a pound. farmers gotta be hurting. ME I JUST SOLD MY GAINS AND WILL WAIT TO SEE WHAT HAPPENS. hope the weight does not break the wagonFlagShareLikeReplyMichael Galaburri 7 hours agoThe DOW is going to hit 20,000 whether we want it to or not, and it will be done anytime from now until the inauguration of January 20th. After there probably will be somewhat of a pullback, but like it or not, this market is going higher - 22,000 on the DOW my friends. Yep, you read it here. The technicals are virtually always right, and though we have our healthy pullbacks, the markets will be rising another10 to 12 percent in 2017 before there is a major pullback.FlagShareLikeReplyShow More CommentsPowered by LivefyreLUXURY REAL ESTATE Johnny Depp reduces price of French estate to $39MJohnny Depp reduces price of French estate to $39M

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EERILY QUIET DOW COULD BE A BEARISH SIGNALThe Dow hasn't traded in this narrow a range since 2014Stocks quoted in this article: DJIA 12/23/2016 10:24 AMAfter a massive post-election rally, the Dow Jones Industrial Average (DJIA) has been much quieter than usual over the past two sessions -- the quietest it's been in years, in fact. On Wednesday, the index traded in its narrowest range since July 2014 (on a percentage basis), and Thursday was another session in which the Dow traded in a span of less than 0.3%. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, these periods of eerily quiet trading could be a bearish signal for the blue-chip barometer.

Below are all the times these signals have sounded since 2012, sorted by the intraday range. The narrowest day was Dec. 30, 2013, with the index moving just 0.2% intraday. As you can see, this past Wednesday and Thursday's intraday ranges rank third and seventh, respectively.

Dow chart 1 Dec 22

Historically, these periods have proved foreboding for the Dow. Going back to 2012, the index has been negative across the board, on average, going out one month after a signal. Plus, the odds of the Dow being positive at any of those points weren't even a coin flip.

Comparing anytime returns since 2012, the Dow's odds of being higher were greater than a coin flip, going as high as 64.1% one month out. What's more, the Dow averages a one-month anytime gain of 0.72%, compared to a one-month post-signal loss of 0.72%. The range-bound behavior tends to beget more range-bound behavior for the Dow, too, as you can see from the the lower-than-usual standard deviation.

Dow chart 2 Dec 22

If history is any indicator, the Dow's dream of taking out the 20,000 level could be postponed in the short term. However, the index is still on pace for its seventh straight weekly win -- the longest since November 2014. And, as Schaeffer's Senior V.P. of Research Todd Salamone recently advised, "If you are a short-term trader, be open to trades on both the short and long side of the market. If you are a long-term investor, do not disturb your bullish positions."

A holiday decoration is seen over Wall Street sign outside the New York Stock Exchange in New York. ― Reuters picA holiday decoration is seen over Wall Street sign outside the New York Stock Exchange in New York. ― Reuters picNEW YORK, Dec 24 — The year-end stocks rally on the heels of the election of Donald Trump as US president was built on expectations of reduced regulations, big tax cuts and a large fiscal stimulus.

Now signs are emerging from the Trump camp that harsher trade policies that could jeopardize the honeymoon are likely in the offing, and investors would be well advised to give those prospects more weight when gauging how much further an already pricey market has to run.

By naming China hawk Peter Navarro as head of a newly formed White House National Trade Council, the incoming administration is signaling Trump’s campaign promises to revisit trade deals and even impose a tax on all imports are very much alive.

Among the policies favored by Navarro and Trump’s pick for commerce secretary, Wilbur Ross, who has the president-elect’s ear on a range of economic issues, is a so-called border adjustment tax that is also included in House Speaker Paul Ryan’s “Better Way” tax-reform blueprint.

If implemented, economists at Deutsche Bank estimate the tax could send inflation far above the Federal Reserve’s 2 per cent target and drive a 15 per cent surge in the dollar.

Analysts calculate that, all else being equal, a 5 per cent increase in the dollar translates into about a 3 per cent negative earnings revision for the S&P 500 and a half-point drag on gross domestic product growth. The dollar index has already gained more than 5 percent since the U.S. election.

He said the border tax could trigger retaliation, pouring uncertainty into the market.

“Even if the drafters of the legislation have pure intentions, other countries could use this as a pretext for propping up or subsidizing their own favorite industries.”

Stocks have rallied broadly since November 8, with the S&P 500 advancing by 5.7 per cent and the Dow Jones Industrial Average surging nearly 9 per cent to brush up against the 20,000 mark. Some sectors, such as banks, have shot up nearly 25 per cent in the post-election run.

US equities have gotten substantially pricier from a valuation vantage as well. The forward price-to-earnings ratio on the S&P 500 has risen by a full point since Election Day, from 16.6 to 17.6, Thomson Reuters data shows. That makes stocks about 17 per cent more expensive, relative to their earnings potential, than their long-term average multiple of around 15.

Small caps have gotten pricier still. The forward multiple on the Russell 2000 has risen to 26 from 22 on November 8, up 18 per cent, while the index price has climbed 14 per cent.

S&P 500 earnings are expected to rise 12.5 per cent next year, according to Thomson Reuters Proprietary Research estimates. Anything that impedes companies from achieving that target, such as a bump from a trade spat or further dollar appreciation in anticipation of new trade barriers, would undermine equity valuations.

In the latest Reuters poll of US primary dealers, economists at Wall Street’s top banks cited Trump’s evolving trade policies over other factors, such as fiscal policy, a strong dollar and higher interest rates, as the greatest risk to the near-term economic outlook.

The idea of a tax on imports “should alarm people,” according to Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

“If we do have a trade war that’s going to be a major negative” for stocks, he said, adding that the upward momentum in equities, alongside the lack of participation due to the upcoming holidays, have so far prevented a repricing but “we could cap the rally here, that could very well happen.”

O’Rourke said technology, a sector that represents the globalisation trade, would be among the hardest hit by taxing imports.

Deutsche Bank’s auto sector equities analyst estimated the border tax could slam other industries that rely on global supply chains, with the cost of a new car, for instance, jumping by as much as 10 per cent. — Reuters

- See more at: http://m.themalaymailonline.com/money/article/stocks-could-suffer-as-trump-trade-policy-takes-shape#sthash.HtYo7dyM.dpuf

Is the stock market ignoring one of the most important risks of 2017?By Ryan VlastelicaPublished: Dec 23, 2016 5:23 p.m. ET

107 Many questions remain about Trump’s policies and geopolitical aimsGetty ImagesMOBILE, AL - DECEMBER 17: President-elect Donald Trump speaks during a thank you rally in Ladd-Peebles Stadium on December 17, 2016 in Mobile, Alabama. President-elect Trump has been visiting several states that he won, to thank people for their support during the U.S. election. (Photo by Mark Wallheiser/Getty Images)In an increasingly tense world, why is Wall Street looking so sanguine?

From a geopolitical perspective, 2016 has been the most volatile year in recent history, with historic elections in Britain, Italy, and the U.S. The election of Donald Trump as U.S. president has ratcheted up anxieties, with the real-estate mogul recently saying that he planned to “greatly strengthen and expand” the country’s nuclear capability, raising the specter of a Cold War-era style arms race.

However, observers may be hard pressed to discern any signs of the swiftly shifting political landscape in the equity markets. After a rocky start, trading this year was marked by a rally that has taken major indexes to repeated records, but despite the tilt higher Wall Street has mostly been marked by a historic level of quiescence.

The CBOE Volatility index VIX, +0.09% a measure of investor anxiety, recently fell to its lowest level since August 2015. According to LPL Financial, the average level for the “fear index” in 2016 was below 16, the fifth straight year it has averaged below 20, the level considered its long-term average. Readings below 12 suggests that the market isn’t betting on any sharp market swings.

Despite that, investors are nearly unanimous that the events of the year have injected huge amounts of uncertainty into the economy. It is unknown what the fallout will be to the U.K.’s vote to exit from out of the European Union, known as Brexit, or the populist movements sweeping Europe. President-elect Donald Trump remains a wild card, as his tweets hint at potentially massive changes to U.S. policy on China, in addition to calling out companies and Wall Street executives.

“The world economy and markets have embarked on a journey into the unknown,” researchers at Pimco wrote in a Dec. 15 note. The firm didn’t adjust its outlook for 2017, but wrote that “our confidence in any particular scenario is low. The reason: the world has now fully arrived in the radically uncertain, ‘stable but not secure’ predicament.”

The most commonly invoked aphorism on Wall Street is “markets hate uncertainty.” So why hasn’t “a journey into the unknown” devolved into wild price swings? Some analysts believe that we might get that at some point—but not yet.

See also: How Trump and Brexit are shaking up investment portfolios for 2017

Perhaps the biggest question mark among geopolitical issue involves Russia. On Monday, the Russian ambassador to Turkey was assassinated by a Turkish police officer, raising tensions that had already been elevated due to the country’s alleged hacking during the U.S. campaign; Moscow has been charged with stealing and leaking emails in an effort to interfere with the election in favor of Trump.

While top Senate Republicans have joined Democrats in calling for investigations into the issue, Trump has dismissed intelligence assessments of the hack, raising questions about the kind of response will be made by the government, if any.

“These are really big wild cards. You hear guys like [Sen. Majority Leader Mitch] McConnell saying that no matter what Russia did, they’re not our friend. And then Trump comes out to say he’s a fan of Putin—that’s a huge chasm, and we don’t know what side anyone is on,” said Michael Mullaney, director of global market research at Boston Partners, which manages $89 billion.

U.S. intelligence and Homeland security accused Russia of directing a series of cyberattacks to influence the outcome of the presidential election.

“If the election was tampered with, then there should be some kind of retaliation, which would fly in the face of both Trump and Tillerson, who is also very friendly with Putin. Those are significant curveballs, and all they do is add more uncertainty to the market,” said Mullaney.

Read: Wall Street’s ‘fear gauge’ implies that few are prepped for a stock-market shock

Mullaney was referring to Rex Tillerson, the chief executive officer of Exxon Mobil Corp. XOM, -0.18% who was recently named Trump’s secretary of state and has had business dealings with Russian President Vladimir Putin.

“Markets have factored in the prospect of lower taxes. That’s the numerical rationale for these gains; it’s not just euphoria about a business-oriented president,” said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group. “We’re not that goofy, overall,” she said of market analysts.

Trump has released few details about the policies he will pursue, making it difficult to evaluate their impact on the economy or corporate growth. Thus far, however, corporate optimism doesn’t seem to match the expectations conveyed by Wall Street’s rapid rise.

Nick Colas, chief market strategist at the ConvergEx Group, recently noted that 2017 revenue growth estimates for Dow components had fallen to 4.5% from the 4.8% that had been forecast before the election.

“If history is any guide, they will be trimming it further,” he wrote of company analysts in a newsletter. “Moreover, our first look at 2018 revenue [comparisons] for the Dow shows analysts expect top line growth to decelerate further, to just 3.7% versus 2017.”

Don’t miss: Stocks get Trump bounce, but not the real economy

Even if fundamentals don’t show signs of weakening, however, the prospect of elevated tension with military rivals like Russia, or with major trading partners like China or Mexico—both of which Trump has threatened to levy tariffs on—could be enough to bring markets down.

“If you look at headlines about our relationship with China getting choppy, or the degree to which we may become buddies with Russia, or about how Europe manages itself in this political age, then it’s easy to see why we expect volatility will come back into this market,” said Bill Belden, managing director at Guggenheim.

“The current lack of concern seems to be that the dust will settle in a way that’s not too dissimilar from what we have now, but even if that’s true, the path to the dust settling is uncertain.”

In recent months, several pieces of longer-term bullish evidence have surfaced, including a signal that has only occurred ten other times in the last 35 years, a clear and factual message about stocks (NYSEARCA:SPY), a reliable contrarian indicator, weekly charts (1982-2016) painting a bullish picture, and a rare reading from a trend-strength indicator.

Signals Assist With Probabilities

No indicator, signal or piece of evidence can predict a highly uncertain future. They simply provide some insight into the probability of good things happening relative to the probability of bad things happening, which implies bad things are always on the list of possible market outcomes.

Rare Secular Stock Market Signal

This week's stock market (NYSEARCA:VTI) video focuses on a very rare secular signal that has only occurred one other time since 1928.

Video

Video

Small Sample Size

It should be noted the video above covers events with a very small sample size, meaning relying on this evidence in isolation is probably not wise. Therefore, our focus, as always, is on the weight of the evidence.

No Forecasting

Our purpose is not to forecast, but rather to understand the facts we have in hand. If the facts change in a bearish manner, which may very well be the case, flexibility will prove to be valuable. It should be noted the first link in this article goes to evidence that was presented on August 20. Since then, despite many dire forecasts on Wall Street, the S&P 500 has gained over 4%

Why a 1929-style crash isn’t “unimaginable” (it has nothing to do with North Korea)

Published: Aug 9, 2017 11:16 a.m. ET

283 ‘It will be a nightmare for this generation, and a gift for future ones’GettyTraders working on Wall Street, in New York. October 1929.

BySHAWNLANGLOISSOCIAL-MEDIA EDITOR

Much has been made lately about how the CAPE ratio — a popular valuation measure applied to the S&P 500 SPX, -0.04% — has ballooned to levels not seen since the dot-com bubble, and before that, all the way back to 1929.

CAPE stands for cyclically adjusted price-to-earnings. It’s also known as the Shiller P/E ratio, named for the Yale professor who created it. While the metric has its share of critics, it’s still considered a standard measurement of market valuation.

Aside from where it stands today, it’s safe to say that only twice before have we seen the CAPE ratio top 30. Both times, the bottom fell out of the market, as you can seen from this chart posted by Michael Batnick of the Irrelevant Investor blog:

In his blog post, Batnick focused on comparisons to the Great Depression rather than the aberration of the late 1990s. He pointed out that, in the 10 years leading up to 1929, the CAPE ratio went from a low of 5.02 all the way up to 32.56.

He cited a Ben Graham article from 1932 in which the legendary investor said, “More than one industrial company in three selling for less than its net current assets, with a large number quoted at less than their unencumbered cash.”

In other words, several businesses were worth more dead than alive.

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Of course, it would have to get almost incomprehensibly nasty for companies these days to be selling for less than their net current assets.

“Honestly, for the market to fall 90%, I’m thinking aliens, an asteroid, or another world war seem the most likely culprits,” Batnick said. In any case, this is what the Dow DJIA, -0.17% would look like if we were to have a 1929 redux:

A Great Depression-esque crash would destroy 28 years of gains and take the blue-chip index all the way back to where it was in May, 1989, Batnick wrote.

Yet there IS a silver lining, no matter how far-fetched it might seem. Those who manage to keep powder dry by stashing cash could very well emerge as big winners, much like those savvy investors sifting through the wreckage after 1929.

Batnick used Amazon AMZN, -0.13% as an example of what a 21st century bargain would look like if things got really ugly.

“Amazon’s net current assets are $2.061 billion. If you could purchase Amazon for this price, each share would cost you $4.29, down from the $994 its currently trading at; a cool 99.57% discount,” he wrote in his blog post. “This sounds absurd and unimaginable. The latter it is, the former it is not.”

Like Batnick said, it’s not as unimaginable as it sounds.

In October of 2008, Charles Schwab SCHW, -1.45% had a market cap of $28.8 billion while holding $27.8 billion in cash. At the time, there were 875 other stocks trading below the value of their per-share holdings.

“U.S. stocks have a valuation that is in line with two of the biggest market peaks of all-time, so if this is 1929, it will be a nightmare for this generation, and a gift for future ones,” he wrote. “And while I can’t imagine a scenario that takes us to Dow 2,400... Dow 15,000, a 32% decline, seems well within the realm of possibility.”

Expect some incredible fireworks when this incredible bull market finally comes to an end.

That’s because the stock market is overvalued according to almost any standard valuation measure, and it’s at such times that, to use the famous phrase from hedge fund manager Doug Kass, risk happens fast.

Consider how quickly some stocks dropped from their highs at the top of the internet bubble in March 2000 — one of the few times in U.S. history when the stock market was just as overvalued as today. It took just three trading sessions back then for the Nasdaq Composite Index COMP, -0.11% to drop 10% from its all-time high — satisfying in a blink of an eye the semi-official criterion of a market correction. And it took just 17 sessions for the Nasdaq to drop enough — a 20% decline — to become a major bear market.

Note carefully that there was no obvious external event that triggered these huge drops. That’s worth remembering, given the recent obsession about a possible geopolitical crisis involving North Korea. Many investors are mistakenly assuming, now that such a crisis appears less likely, that happy days are here again — fueling a 135-point rise in the Dow Jones Industrial Average DJIA, +0.02% on Monday.

We all need to remember that when the stock market is hugely overvalued, as it is today, a major bear market can begin for seemingly no external reason.

Interest rates are on the rise. Here's what this means for your moneyHow overvalued is the stock market? The chart below paints the depressing picture: According to six widely-used valuation measures, the market currently is more overvalued than it was at between 86% and 100% of the three dozen bull market tops since 1900. (I relied on a bull market calendar maintained by Ned Davis Research for a precise list of those market tops.)

To be sure, the U.S. market by most measures was more overvalued at the top of the internet bubble than it is today. But not according to all of them. The S&P’s 500’s SPX, -0.05% price-to-sales ratio currently is just as high, if not slightly higher, than where it stood in March 2000. (Precision is difficult, since only quarterly data are available for S&P 500 sales per share, and even then with a lag.)

None of this means that a bear market will begin immediately, of course. The stock market can remain overvalued for a long time, and become more overvalued.

Don’t conclude from this, however, that valuation doesn’t matter. When stocks are as overvalued as they are today, almost anything can become a bear market trigger. And sometimes it takes nothing at all.

This is the ‘wall of worry’ that stocks have climbed to rally 271% since 2009Published: Aug 16, 2017 7:12 p.m. ET

Stocks have not been this resilient since 1965

BySUECHANGMARKETS REPORTER

iStockStocks keep on climbing the “wally of worry” to new heights.This may be the most sedated stock-market rally of our times.

Even as tensions heightened between the U.S. and North Korea and violence broke out on the streets of Charlottesville, Va., stocks took the alarming news in stride, continuing to scale the “wall of worry” in defiance of doomsday predictions of an imminent selloff.

“It seems like every day the headlines outside of the market get more and more frightening,” said Michael Batnick, director of research at Ritholtz Wealth Management, who illustrated the resilience of the market in the chart below.

Michael BatnickAs the graph shows, since stocks bottomed in March 2009, the S&P 500 index SPX, +0.14% has soared 271% to multiple records, meandering higher through the European debt crisis, Brexit, and the U.S. presidential election.

Batnick had originally published the chart in March but updated it Wednesday given the recent developments.

“This year has been the perfect reminder that political volatility does not necessarily translate into the stock market, with this being the quietest year since 1965,” he said.

The S&P 500’s daily trading range averaged 0.32% in the first half of the year, the narrowest in over half a century, underscoring the gap between market volatility and the political upheaval that has marked Trump’s presidency so far, according to Batnick.

Stocks finished modestly higher on Wednesday with the Dow Jones Industrial Average DJIA, +0.12% gaining for a fourth session in a row as investors shrugged off the latest imbroglio out of Washington.

Much of this tranquility can be attributed to strong fundamentals as the economy continues its steady pace of expansion along with robust corporate earnings. Optimism over President Donald Trump’s pro-business agenda, including promises of lower taxes and deregulation, has also helped to keep the market’s upward trajectory intact. Some of that euphoria has waned since the early days of Trump presidency amid a series of political setbacks such as the high-profile failure to repeal and replace Obamacare. But investors, to a large degree, still seem to have faith that the embattled president will deliver the tax reforms he had pledged.

Likewise, the analyst believes that when the end comes, it won’t be triggered by the usual suspects like elevated valuations.

“This is sort of a chicken and egg problem,” said Batnick, in response to a question on what will derail this market. “It won’t be a high cyclically adjusted price-to-earnings ratio or news coming out of Washington, the answer to that question is simply falling stock prices.”

Cramer rationalizes the sell-off — and says it's not happening because of Trump"Mad Money" host Jim Cramer reacts to Wall Street's many reasons for Thursday's sell-off.From Washington to earnings, market-watchers have offered various explanations for the pullback.But none of their explanations seem to be enough to drag stocks lower, Cramer says.Elizabeth Gurdus | @lizzygurdusPublished 5 Hours Ago | Updated 3 Hours AgoCNBC.com Cramer: Selloff not happening because of Trump Cramer: Selloff not happening because of Trump 4 Hours Ago | 00:59Jim Cramer is no stranger to August sell-offs.

"Welcome, August. Where you been?" the "Mad Money" host exclaimed on Thursday. "For as long as I've been in this business, August has been a month where we have unexplained or inexplicable, sudden sell-offs, including nasty ones like today."

As the Dow Jones Industrial average fell more than 250 points intraday, experts blamed the decline on everything from President Donald Trump's tiff with the CEOs on his now-disbanded strategic councils to the earnings report from Dow component Cisco.

So Cramer decided to go over the market's many reasons for the decline and explain his reaction to each explanation.

Trump's CEO Problem

The first was the most obvious: investors were selling because they saw Trump's rift with business leaders as an obstacle to the president's economic agenda and thus to the bull market.

"If you're selling stocks because so many CEOs are getting off the Trump train, I've got a news flash for you: you need a better reason," Cramer said. "Trump's economic agenda is stalled because Congress can't get its act together. It can't even pass a debt ceiling bill. If the executive council dismissals is what makes you want to sell, you should've gotten out months ago."

Cramer argued that while the CEOs were in favor of some of the Trump agenda's key points, like tax reform and repatriation, they were more concerned about their shareholders and backing the president's highly controversial comments about the violent protest in Charlottesville, Virginia.

But their public departures did not constitute a reason to sell, he said.

Gary Cohn

The second-most cited reason for selling has been the rumor that one of Trump's top advisors, former Goldman Sachs executive Gary Cohn, is preparing to step down from his role as head of the National Economic Council.

Cramer said that while his departure would justify investors taking profits, the White House's unequivocal denial of the rumor effectively erases any reason to sell on the reports.

"I certainly can see that Cohn's important enough to Trump's economic agenda that his leaving would really hurt the stock market," Cramer said. "But then again, the White House issued a statement saying he's not going anywhere, so it's not a particularly cogent reason to sell."

Earnings

The market may have shrugged off earnings from Cisco, but Cramer said that really only justified investors are selling their shares of Cisco. The tech giant's success hinged on how shareholders viewed its execution, not because there was a lack of demand for its products, he said.

Shares of Wal-Mart also slid after the retailer reported. Cramer thought it delivered an excellent quarter, and attributed the stock's decline to the market's already-high expectations.

Spain

The fatal terrorist attack in Barcelona where a van plowed into pedestrians, killing at least a dozen and injuring more than 50, may have shaken investors, but Cramer pointed out that if markets sold off on every terror attack, they would be below zero by now.

Final Thoughts

Cramer's reason for Thursday's sell-off was simpler than what he saw on his Twitter feed.

"It's August. It's slow. It's thin. It's time for vacation. Stocks have had a big move. Why not sell some?" the "Mad Money" host said. "I bet this sell-off isn't done. It could get uglier. We're due. I also believe we'll get a bunch of sell-offs like this one over the next six weeks because that's what happens every year at this time. I've been telling you this. So, if you haven't done so already, please sell your least favorite stocks tomorrow to raise some cash so that you'll be ready to pick up your most favorites as they come down and become bargains."

And as markets recover from the second-worst day of the year for the Dow and S&P 500 indexes, Cramer asked that investors keep the "August sell-off" track record in mind.

"The calendar and these weak-handed momentum shareholders that have gone along for the ride have coalesced to produce a wave of selling," he said. "Now you have to ask yourself, will the president seize that as an excuse to deflect anyone who wants to link this decline to the White House, blame it on August? Why not? Beats blaming the CEOs who broke with the president, unless you're the kind of guy who just loves having someone to blame."